The fiscal deficit reaches 4.5% GDP in 2021, close to half of expectations

ISRAEL - In Brief 11 Jan 2022 by Jonathan Katz

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The fiscal deficit in 2021 reached 4.5% GDP, close to half the initial estimates at the beginning of the year (expectations of over 8%). Total fiscal revenues increased by 30% y/y (and by 19% compared to 2019) on the back of capital gains taxation of the hi-tech sector, strong real estate activity and robust domestic private consumption as Israelis travelled less abroad. Non-Covid expenditure increased by only 3.9%, more moderate than average expenditure growth of 5.0% in 2014-2020. The debt/GDP declined to 69% from 72.4% in 2020, in part by the strong shekel eroding the external debt in shekel terms. We expect a fiscal deficit of 3%-3.5% this year, while the BoI sees 3.6%, assuming a minimal impact from Omicron. Clearly, the Omicron risk could push the deficit slightly higher, if the government decides to hand out fiscal supports to those sectors hurt by the decline in activity (tourism, culture, etc). So far, the Ministry of Finance is holding tight and hoping that this Covid wave declines quickly. Looking at fiscal financing in 2021 reveals a total of 73.7bn (63.9bn net domestic, -3.8bn net issuance abroad and 13.6bn from land sales (privatization)), above the deficit financing requirement of 68bn. The net excess financing of close to 6bn ILS follows 23bn in 2020! Basically, this means the government debt was increased by close to 30bn ILS unnecessarily (1.8% GDP). Reducing this excess issuance in 2022 will mean a low level of bond issuance. This should be positive for the bond market.